Latvia Infrastructure Report 2009

The global economic crisis has hit Latvia hard and an IMF loan looks to be on the cards to bail the country out of its precarious financial situation. Due to recent economic growth stemming from consumer credit-fuelled growth, the country is now suffering a wide current account deficit and a large external debt pile. The drying up of consumer demand and consumer credit is threatening the country's economic growth, which contracted by 4.2% year-on-year (y-o-y) in Q308.

The impact on the country's construction sector has also been noticeable, as the total value of new orders in the industry, including residential, non-residential and civil engineering structures, fell in Q308 (EUR394.8mn) compared with Q307 (EUR479.8mn). For the first nine months of 2008 the total value of new orders reached EUR1.52bn, down from EUR1.66bn for the same period of 2007.

The impact on construction in the country is reflected in our revised forecasts for real growth in the industry, which we now expect to contract by 1.8% y-o-y over 2009. By 2010, growth will be positive again and continue to rise until the end of our forecast period in 2013, reaching 2.7% y-o-y. However, growth in the industry will remain limited compared with the previous highs experienced in the country in the first half of the decade.

Public sector investment in the transport and utilities sector was strong in 2008 and is set to continue into 2009, with various expansion plans already announced. In the transport sector, Transport Minister Ainars Slesers stated that he expected road construction to triple y-o-y in 2009. The investment is mainly being targeted at the construction and upgrade of highways, which are currently of secondary importance to Latvia's more efficient and extensive rail network. The rail network is also expected to receive a boost in the form of the Rail Baltica project. In November 2008, it was reported that construction of the first stage is due to begin in 2010 and be completed by 2013. The project will further integrate the Baltic states' transport network and enable a more efficient and thus cheaper route to transport freight.

The power sector has also seen a great deal of investment interest, fuelled by a focus on plugging the expected supply gap which will follow the shut-down of Lithuania's Ignalina Nuclear Power Plant, due in 2009. Like many of Lithuania's neighbours, Latvia relies on power from the plant. Indeed, Latvia relies on imports for much of its power supply, and therefore the issue is presenting a serious threat to the country. The Baltic countries and Poland have agreed upon the construction of a new nuclear power plant in Lithuania to replace Ignalina, which will be jointly constructed and the power shared. However, this project is currently only in its environmental impact assessment phase and therefore short-term solutions are necessary. Latvia's approach to the problem is both the construction of thermal power plants, which are due to come online in 2015, and an investment plan of EUR596mn between 2008-2010 by Latvenergo to upgrade and expand existing plants. However, BMI believes that Latvia may face power shortages following the shutdown of Ignalina.